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Malaysia: New Test for Fiduciary Duties of Employee

In the recent Court of Appeal decision with grounds of judgment dated 9 September 2015 by Tan Sri Idris Harun, the Court of Appeal set out the test for the imposition of fiduciary duties on employees.

Unlike a director, an employee of a company would ordinarily not owe any fiduciary duties to the company.An employee may owe contractual duties as well as the common law duty of fidelity to the employer, but this is far removed from the stricter fiduciary duties.

Where an employee carries out some form of wrongdoing, whether to cause damage to the company or to even fraudulently dissipate monies or assets, the company may then be confined to merely seeking personal remedies against that employee. So, for example, to sue for breach of the contractual duties and may make that employee bankrupt. Any monies or assets secreted away to other individuals or entities may be out of reach of the personal remedy.

If a fiduciary duty can be imposed on the employee however, and if the employee acted in breach of those fiduciary duties, the company could likely rely on the far wider proprietary remedies. The company could argue that any monies or assets wrongly dissipated are held on constructive trust, and the company could cast the net wide through equitable tracing to trace the monies or assets.

In this Court of Appeal decision, on the facts, the employer failed to establish liability against the employees for any breach of fiduciary duty.

Nonetheless, the Court of Appeal upheld (at page 25) the finding that there was a fiduciary duty owed by the employees to the employer.

The test that the Court of Appeal applied appeared to focus (solely) on the fact that the contract of employment involved receipt of the company’s property. That appeared sufficient to impose fiduciary duties on the employee.

This dramatically lowers the bar to establish fiduciary duties on employees, regardless of the level of seniority of the employee in the organisation. It was sometimes held that a senior-ranking employee, such as a CEO, may owe fiduciary duties to the company. This appellate decision may now make it far easier to impose fiduciary duties on employees.

Earlier, I had touched on how the Federal Court had ruled that the standard of proof of fraud is now on a balance of probabilities. With a clear threshold to meet to impose fiduciary duties on employees, an employer will now have wider remedies to try to recover against an employee the proceeds of the fraud.